For a second consecutive week, US equities wobbled but concluded on the right side (positive of course) of the ledger with the S&P500 adding +0.2% amid what many investors and the financial media continue to highlight as mixed signals. Bears are saying the decline in bond yields and plunge in oil prices are screaming recession. And, the Citi surprise index has plunged while contending at the same time a lack of inflation means lack of demand. They also argue the Fed is tightening too aggressively and too early in light of these less than robust data points indicate is necessary. Meantime, Bulls are saying goldilocks conditions, not-too-hot and not-too-cold growth and low inflation, continue to pave the way for steady economic expansion. They cite leading indicators continue to increase and unemployment claims remain low; house prices are rising and corporate earnings are poised to continue the 1Q experience of general outperformance relative to both expectations and the year-ago period.

Stepping back from the commentary, the data last week indeed remains a mixed bag. The US yield curve continued to flatten last week while company surveys report a steady and optimistic tone from businesses; oil continued to move lower (and broke the threshold for a technical bear market) but copper and iron ore began to improve. Corporate spreads remain steady (suggesting credit risk is not rising meaningfully as it did last year during the oil selloff), but economic data from China was mixed. US retail continues to be a tale of two extremes as Amazon continues to prosper and innovate while more traditional outlets suffer and try to play defense. More short-term positive was that US housing activity seems to be improved following the weak reading that captured attention last month. And on the US policy front there remains at least the appearance that Congress is still attempting to move its agenda of healthcare and tax reform forward despite the expectation by many that a toxic Trump presidency will torpedo any actual progress on hoped-for pro-growth fiscal policy (this was observed through the outperformance of the healthcare sector last week). Another positive was a report that US banks are in very strong and healthy shape following release of recent stress test results.

At the end of the day, what remains most clear is that the days of easy US monetary policy are ending and the market seems to retain at least some hope (even amid rising skepticism) that fiscal policy can successfully pick up the baton. Additionally, while the US economic and financial market cycle is now among the longest in history (it was 10 years ago in June that the US housing crisis began to unfold and morph into a full-blown global financial crisis lasting through Spring 2009), economic conditions and animal spirit sentiment outside the US and particularly in Europe are earlier in their recovery phase. This improvement abroad provides a tailwind in an ever more globalized economy and investors are viewing the recent crash in oil prices as an issue of oversupply rather than one of weakening demand. Bottom line: for the moment we believe the bulls continue to retain the upper hand in this goldilocks story; the bears have not yet began to head for home and recession risk still seems all but imminent. Still, investors must acknowledge that a market pause or more meaningful pullback seems well overdue in the short-term following complete hiatus since the beginning of 2017. Complacency born by persistent low volatility is a recipe for short-term surprise should unexpectedly weak data present itself.

Enjoy the upcoming 4th of July holiday and be on the watch for our latest quarterly newsletter to come in the first part of July.

The second full week of June, which yielded more flat market performance with the S&P500 barely changed at +0.1%, seemed to offer a little bit of something for everyone. Volatility and the daily trading range observed was up a touch relative to the sleepy pattern investors have grown accustomed to so far in 2017, but remains low by historical standards. Perhaps the most notable development throughout the week was the Fed decision to raise short-term interest rates by another +0.25% bringing its target up to between 1.00% and 1.25%. This hike came despite some recent readings suggesting softer than anticipated and desired inflation. With that, the bearish camp can find support for their case in observing the continued flattening of the yield curve (inverted yield curves have served as a reliable leading recession indicator), weakness in oil, or the recent reversal in what has been the high-flying tech sector so far this year. The glass-half-full crowd might instead choose to focus on the rotation by the market into Financials (often described as the transmission of the economy) despite flatter yield curve, the weakness in gold stocks, or the resiliency from the Industrials sector. Whatever side you find yourself, the market continues to send mixed signals.

From a fundamentals perspective, we already highlighted perhaps the biggest development with the Fed rate increase last week, although the decision was well telegraphed and of essentially no surprise to market participants. Outside of that news, there was a package of stronger data around the world including key manufacturing indexes, Eurozone and Canadian employment, bank lending in China, Indonesia imports, and retail sales in Singapore. Those insights would tend to suggest then that recently cooler inflation readings despite continued labor market tightness are due to more transitory factors such as sliding oil prices on too much production and technology disrupting other goods and services pricing structures than an indication of a slowing economic environment. On the weaker front, some recent housing metrics in the form of new permits and mortgage have been disappointing relative to the time of year, as well as slumping auto sales; these are two sectors of the US economy that have significant trickle-down impacts so downshifts in activity are worth noting.

As observed in our update a week ago, perhaps the most unsettling attribute of recent market dynamics is the flattening yield curve. In that vein, the Fed decision and relatively hawkish press conference did not help. Either forward growth and/or inflation expectations need to lift for the yield curve to steepen when the Fed is in the process of propping up short-term rates. Further, stocks are admittedly not cheap, but it is important to also note that neither are bonds, real estate, or about anything else that is investable. If the financial crisis and unprecedented level of monetary stimulus applied in its aftermath in pursuit of stabilizing the economy has done nothing else, it has created a lot of money that generally remains underutilized and unproductive on corporate balance sheets or being hoarded earning decidedly less than inflation. It is from that perspective that valuations cannot be viewed as a timing tool, because significant sums of that money remain in search of more productive or opportunistic uses. Further, this logic probably also goes a long way toward explaining why the Fed continues to communicate a plan of additional rate increases, albeit at a still slow pace. After all, this has never been a normal economic or rate cycle, but the economy is strong enough now to pursue normalization (very slow but incremental steps away from extraordinary accommodation). In the short run, we suspect that what is a more difficult seasonal stretch of the year, coupled with mixed data and hawkish speak from the Fed will produce some anxiety for the markets, but that is unlikely to mark the end of this cycle.

Broadly, US equities were mixed for the week ended June 9, but remain higher after 7 trading days in June. The S&P500 slipped -0.3% at the same time as the Dow added +0.3%; meanwhile the tech-heavy Nasdaq which is outstripping virtually all other US market barometers so far in 2017 slipped noticeably on Friday and logged a -1.6% dip for the week (still up +15.3% YTD). Perhaps more notable however is that overall market volatility remains depressed and might best be characterized as sleepy. Some feared heading into the week that a hotly anticipated testimony by former FBI Director James Comey might reveal a smoking gun, active conspiracy, or attempt to obstruct justice by the Trump administration and be the straw that breaks the new Presidents back (the testimony delivered on none of those accusations). And, that story did capture most of the attention and discussion for the week. We also witnessed political populism return with the significant loss of representation by the conservative party in the UK following its election, which all else equal results in a more uncertain geopolitical environment and fattens Brexit tail risks. But consistent with the overall theme of recent months, it remains hard to see much of anything upset the financial markets.

Last week we wrote in our monthly commentary that fundamentals such as economic readings and corporate earnings matter most for any investor with timelines beyond the shortest of term (not political noise or media headlines attempting to provoke emotion). In that regard it was another week that kept alive the more constructive case that building for much of the last 12 months: slow but steady improvement not just here in the US but around the globe. Admittedly, that pace of improvement continues to disappoint depending on who you talk with. But the global economic landscape and outlook has much improved; employment continues to trend higher; and industrial production remains firmly in expansion in countries like Germany and China. US bank lending also continues to advance and corporate earnings estimates for the remaining quarters of 2017 are being revised higher suggesting the huge year-on-year progress reported for the 1Q will continue. Mortgage equity withdraw (the act of monetizing equity in your home value) is on the rise again after being virtually dormant since the financial and housing crisis in 2008, and acts as another support for the powerful US consumer. Unfortunately, the week was not without some soft data points as well that give ongoing concern including the recent slide in commodity prices including iron ore and oil prices; typically commodity prices should be expected to rise as economic growth is accelerating. In a related way, inflation expectations are slipping as the Fed is expected to raise interest rates for the 2nd time this calendar year (usually an inflation fighting tool); this will continue to gain attention especially as it would otherwise naturally cause the yield curve to further flatten or move toward inversion (an ominous and early recession signal).

While soft data (surveys, consumer, and business sentiment) continue to suggest a supportive backdrop for the economy, corporate earnings, and thereby financial markets, one of the biggest mental obstacles for investors to overcome and remain constructive remains the age of the current bull market. Additionally, following roughly 15 months of a strong rally by domestic equities without a meaningful correction, the valuation of domestic equities is not cheap. In that regard, foreign which has generated attractive performance here in 2017 but lagged badly for several years, looks to have additional and significant room to run assuming that foreign political complexities (European referendums and elections) do not steal what appears to be an upturn in economic progress. As we look to the weeks ahead, the pace enjoyed by investors in recent months seems overdue for a pause and we are also entering what is typically a softer period of the year from a seasonality perspective. That said, when reviewing the confluence of data, skeptical sentiment, and slow but steady pace, it would suggest this economic cycle is not at a near-term risk of dying and more gas is still in the tank.

Investors witnessed the sharpest one-day decline since the Election last week, declining -1.8% on Wednesday as headlines broke that President Trump may have tried to suppress the FBI investigation into his administration involvement with Russia. As news of that latest twist in the ongoing saga between the new administration, the FBI, and what appears to be a very serious war by the press and government insiders (leakers) against the new President, the word impeach became front and center conversation and doubts growing that Trump will still be President of the United States in 2018. Financial markets are rarely helped by uncertainty, and it goes without saying that these latest developments increase anxiety while also appearing at first glance to reduce the odds that the pro-growth political agenda credited with at least a portion of the market rise over the last 6 months will come to fruition. Yet, to the surprise of probably many, US equities managed to largely reverse the acute one-day damage and conclude the week down just -0.38% from where it began.

Why the sudden positive reversal by the markets on Thursday despite the ongoing uncertainty surrounding the President? From our perspective: Economic Fundamentals. A look back at the two modern-day parallels of such Presidential uncertainty in both Nixon and Clinton (impeachment hearings) impeachment eras reveals that the market continued to be driven by economic underpinnings and were little affected by the political noise of the day. Logically, this makes sense because the questions any investor should ask themselves when weighing new developments of any sort is, how does this news affect the real economy? Will it impair the current operating thesis that growth will continue? Specific to this political storm, is this latest controversy going to affect how consumers spend (will they be less likely to purchase a new car, home, or even curtail their consumption of new clothing, electronics, food, or vacations)? Probably not from our perspective. Secondly, does the political circus reduce the likelihood of pro-growth policies materializing from what were previously expected? This second question is more debatable, but one could highlight that expectations of Trump being successful were steadily declining since inauguration to now sit at a level where many believe we are back to Washington dysfunction as usual. A contrarian might ponder, with expectations so low the possibility for positive surprise and appetite by the legislative branch of our government to move forward on tax reform and infrastructure investment despite Presidential controversy is only amplified.

Where does this leave us? From an economic perspective, the US and global economies continue to enjoy an improving backdrop. Just concluded was an extraordinarily strong 1Q earnings season when comparing it to a year ago. We also continue to receive data showing a pickup in home demand, low unemployment, rising consumer net worth, and lots of money still looking for a more productive place to land. Credit conditions also remain accommodative for corporate finance as evidenced by low credit spreads while European economic data continues to show improvement abroad. From where we sit, political turmoil and worries usually tend to be noise and most influence the short-run. The real focus for investors must remain the fundamentals and on that score the economy and by extension the financial markets, still seem to have some fuel left in the tank. At the very least however, 2017 looks like it just got a lot more interesting as the soap opera that currently describes this Presidency just became a lot more intense.

Domestic equities continued their quiet walk during the 2nd full week of May, experiencing the smallest average intra-day trading range of the year and among the lowest in history. Some undoubtedly find the calm mood peculiar; there remain more than ample worries to fill the room; the sudden firing of the US FBI director, ongoing geopolitical tension, and renewed news of Chinese economic turbulence are top of mind. But historically, periods of quiet volatility are accompanied by above average market returns. The broad market as measured by the S&P500 did slide -0.3% for the week but remains roughly flat here in the month of May. On that score, the sentiment among some financial media that investors are perhaps too stupid to realize the Trump administration has delivered none of its promises on the economy, may appear correct at first glance. But what is lost in that simplification or attribution for performance is reality of a dramatic improvement in corporate earnings following what was a 4 quarter contraction beginning 4Q2015. Said differently, while a Trump Bump was probably responsible for the market advance in the aftermath of the election in November and through early Spring, fundamentals are improving if for no other reason than some easy year-over-year comparisons and those are what should be credited with ongoing market stability.

As alluded to above, corporate earnings are the key force supporting the financial markets at this point (as they theoretically should be throughout any cycle). With over 90% of the companies in the S&P500 now reported for 1Q, nearly 3-in-4 beat street expectations by at least 1% and the aggregate level of growth now stands at +14% over last year. That is a big and broad-based improvement! Aside from corporate earnings, economic data around the world was also favorable as global leading economic indicators continue their hook higher; soft measures including surveys on activity and sentiment are improving; employment remains strong and unemployment is now toeing all-time low levels; and data in Europe remains quite favorable following nearly a decade of stagnant growth and political discord; all while reported inflation is not problematic. There were also news reports that the housing market is heating up with new households opting to purchase vs. rent for the first time in many, many years. Housing is important because the construction and occupancy of new homes has significant favorable trickle-down effects for broad swaths of the US economy including both manufacturing and money velocity.

So despite what is now a virtually uninterrupted climb for the financial markets since the election and even last summer, the path of least resistance seems to be higher. We are not deaf to the argument however that a more noticeable pullback or correction is overdue. Still, any such retreat would tend to be viewed by us as an opportunity to rebalance or more confidently deploy capital into quality businesses given that the US economy has never entered a recession when corporate earnings were on the rise as they are now. This economic cycle is mature, but the fundamentals across the US and developing in Europe suggest a market that is at little risk in the near-term of falling apart.

US equities continued their move higher for a second week, resulting in another month of gains for domestic equities. But the real story during April was the strong performance turned in by international markets. While domestic equities as measured by the S&P500 climbed roughly +1% when including dividends in April, the MSCI EAFE more than doubled domestic performance with its advance of +2.5%, mostly occurring following the first round of the French election process with a result that suggests populist anti-establishment movements that pose great uncertainty to the global financial (same forces that are credited with driving Brexit and election of Trump in 2016) norms may be losing momentum. Also encouraging during the second half of April was a return of outperformance to the more economically sensitive areas of the equity markets including financials, smaller-size companies, and industrials.

From a fundamentals perspective, the final week of April was generally positive. Perhaps most noteworthy was the strong performance being turned in by corporate America for the now complete 1Q reporting season. More than 200 of the S&P500 constituents reported quarterly earnings last week, and are looking set to beat not only earnings, but also revenues. When looking at earnings, it is appearing likely that aggregate index earnings will be up roughly +13% over the same period last year! While one considers that the year-ago levels make for some easy favorable comparisons, the nominal improvement remains quite noteworthy and is overshadowing the weak real (after-inflation) GDP growth being reported for 1Q17. The US economy has never (yes, never is a powerful word) entered a recession when corporate earnings were rising, let alone so strongly. For the economy as a whole, US data also continues to provide support to those subscribing to the view that the economy remains in a strengthening trajectory. US bank lending is shown to be increasing over recent weeks; Iron ore prices (a key input to industrial production) are again rising; and wages are accelerating as is household formation and the homeownership rate. Abroad, European earnings for 1 are on pace to advance +24% over year-ago-levels even as central bankers around the globe remain accommodative with inflation data remaining benign. All of this suggests that economic activity will again repeat its recent-years pattern of a marked slowdown during 1Q and rebound in the Spring.

With the first four months of 2017 being so decisively strong for investors, the phrase advocating to sell in May and stay away naturally creates anxiety for investors and even perhaps the impulse to temporarily abandon long-term objectives. We too believe that it feels like the market is due for a more meaningful pullback than anything witnessed in the last 6 months. Yet while we are now entering what is often a more seasonally challenging month for long investors, the sell-in-May crowd (whos most avid subscribers advocate not buying back in until after September) would have experienced very mixed-success and disappointment in recent years. Further, out today from a technical team at research firm Strategas Research Partners is a chart showing that when the broad indexes are in an upward sloping trend, performance in these stereo-typically softer coming months continues to skew positive. We remain of the perspective that trying to time pullbacks reduces investing success to that of luck; and while we may see a decline as we enter what is often regarded as the dog days of summer, such a move would be viewed as a buying opportunity rather than the start of a material change in trend.

Following several weeks of wobbly economic data, rising geopolitical worries, and intensifying doubts regarding the ultimate fate of pro-growth fiscal agenda set forth by new President Trump, US equities managed to reverse their recent bleeding last week. The S&P500 mustered a gain of +0.8% despite a back-and-forth wobble experience day to day. But more encouraging was that small-size companies and even broader indices such as the Wilshire 5000 fared better perhaps suggesting a return to improved sentiment might be nearing following weeks of deterioration and rising pessimism. At odds however with the more cyclical equities rebound last week has been fresh buying of US treasury securities, often regarded as the safety or risk-off trade when markets are jittery.

From an economic perspective, good news outweighed bad. Corporate sentiment and activity surveys show demand continues at a healthy clip; bank lending is rising and indicates confidence and steady demand; wages look to be accelerating; and gridlock on a significant piece of regulatory reform appears to be thawing (healthcare reform) here in the US is breathing fresh hope into the overall projected success of even bigger policy desires such as comprehensive tax reform later this year. And on a more granular level, anecdotal evidence from a broad swath of US cities both big and small can be viewed as borderline booming. Across the pond, economic data out of the Eurozone including leading indicators, consumer confidence, and auto sales were all quite favorable as well and support the thesis that the continent is finally participating in earnest in the economic expansion after years of muddling. Nominal GDP in China also accelerated to +11.8% over last year; a quite-strong reading no matter how one wants to look at it considering that the country is the 2nd largest contributor to global economic growth.

With economic data remaining supportive, the stalling of US financial markets since the beginning of March and April may be best explained as a needed and overdue breather. Financial markets rarely trend in one direction without pause, nor do they usually move so linearly. There have been more than enough concerns to explain the recent weakness as well. At the same time, recent demand for safe-haven trades like US Treasury securities last week, that normally signify risk aversion and caution may best be chalked up to heightened anxiety over the fate of the Euro amid the French elections over the weekend in which it has been feared another populist anti-establishment (and in this case anti-EU/anti-Euro) candidate was running close in the polls. To the relief of many, it appears that populism may be ebbing, which is being credited with global financial markets moving sharply higher as we write today. All this aside, recent weakness has been relatively tame, and while investor sentiment has deteriorated quite a bit perhaps signaling a return to more favorable trends might be near, we are also mindful of the calendar which historically is less accommodative. Bottom line though: we are not advocates of market timing (as the sharp reversal late-week last week and today perhaps may illustrate), especially when the longer-term trend is believed to remain firmly in place and supported by sound economic data. We still believe the economic cycle gives the up-trend the benefit of doubt.

Following their all-time high on March 3, US equities continue to drift lower in recent weeks on the perspective that hard economic data is still not yet fully confirming the improvement in soft-data (aka consumer and business sentiment). The S&P500, Dow, and Nasdaq were each more than -1% lower for the Easter holiday-shortened trading week and broadly some -2.8% below their all-time highs set on March 1. While economic data has not broken down nor is it suggesting that the economy is slowing, it is yet to reveal a very noticeable uptick in the pace of activity either. In addition to the weakening sentiment over the growth outlook, there have been too many changes recently for the markets to completely shrug off; most notable recently is the rise in geopolitical risks including the strike on Syria by the US a week ago and another bombing effort targeting ISIS in Afghanistan late last week all while tensions continue to rise between the US and Russia, as well as rising hostility and displays of provocation from North Korea. These events are capturing the focus of investors and upping the uncertainty of what intensifying global conflict may look like on the soft-data.

From an economic fundamentals perspective, the weight of evidence continues to support the view that the US and global economy is doing fine and not at risk of a recession. Unemployment claims, construction equipment dealers, the oil rig count, as well as mortgage applications for purchase, consumer comfort, and global leading indicator index continue to post respectable numbers. At the same time however, traditional US retail (brick & mortar) continues to snatch headlines and paint a picture of slipping demand; it is worth noting that many of the troubled retailers are companies whom which broad swaths of consumers shop regularly and thus carry outsized headline risk. With that said, online retail is it logging growth that more than explains the decline in physical retail locations, so it would appear that consumers are still spending, but shifting their activity online and away from the local stores. Corporate earnings season is also underway for the 1Q period, and looks set to post gains of around +3.3% over last year; this is helping credit spreads remain tight and inflation expectations relatively firm.

Bringing everything together, we sense that a number of investors are growing anxious following what has been a very strong 6 month period. There is also of course the perspective that the current bull market phase is quite aged by historical standards no 8+ years and counting and early-year momentum is slowing. It is no secret that from an absolute level, financial markets and stocks are not inexpensive, an attribute that historically implies below-average forward returns. In agreement, we have highlighted for several months now the potential for a near-term pause or drawdown to occur, especially amid diminishing hope that a non-traditional President might be able to change the level of political dysfunction we have grown accustomed to. But while we would not be one bit surprised to witness a pullback by the markets, especially amid rising geopolitical concerns and a softening growth outlook by investors, the signposts for a more sinister unraveling or end to the current economic expansion are not in place. Historically, rising corporate earnings preclude a recession and bear market occurring in the near term. Additionally, investor sentiment remains all but euphoric, if anything seems more stuck in the skeptical category. From our perspective, this remains a market that is not young, but also lacks an easily identifiable excess that threatens the economic outlook. Historically an expanding economy has minimized the risk of a bear market and/or economic recession. That view is only further reinforced by the majority of economic readings outside the US and most notably China (being the 2nd largest global economy) that are also in an improving trajectory and is like having the wind at your back. Again, we believe the markets may continue to consolidate near-term, but full-year outlook is one that rewards remaining in the game.

March drew to a close Friday, with the S&P500 notching a respectable gain of +0.8% for the week. With that, the 1Q concludes with a very strong gain of +6.1% when including dividends (total return) despite the month of ending in a relative wash (+0.1%). Putting the first 3 months of 2017 in context, the S&P500 enjoyed gains in excess of 5% to begin a New Year 24 times since 1950. In those instances, 2Q and rest-of-year performance was skewed to the upside, even though almost all years experienced a pullback of -10% or more at some point which we obviously have not yet seen to-date. Yet perhaps more interesting than the strong performance is the strength of foreign markets especially during March after a several year hiatus and being a performance detractor. It would seem that for the first time in recent memory, foreign economic fundamentals are working in concert to create an economic backdrop that is more globally broad.

From a fundamental perspective, the most recent week was mixed in the US. Retail surveys, unemployment claims, bank lending, consumer comfort, and leading indicators softened a touch while at the same time home sales, corporate profits, the rig count, and a host of foreign indicators showed improvement. Additionally, fresh news out of Washington seems to be quieter following the prior week failure of the new Trump administration and Republican led congress to put forward a vote on reform/repeal measures on healthcare (insurance marketplaces) reform. As a result of that setback, analysis of recent factor performance suggests that investors are placing lower odds on tax reform success, which is visible through companies with the highest tax rates giving back some of their post-election outperformance since the ACA stalemate a week ago last Friday.

Entering 2Q, historical analogues suggest it would be unwise to fight the trend. Yet the news cycle may be setting up for some near-term disappointment. This week, all eyes will be on the latest US employment report; with the February report being so strong some are quietly anticipating that March figures will miss expectations on the logic that unseasonably warm weather this past Winter and in January and February pulled forward seasonal hiring. Additionally, as much as one would like, political noise seems likely to be an attribute throughout much of 2017, especially as details on tax reform begin to flow and parties again dig in to argue partisan positions. Also a feature of the post-2009 economy has been one of two steps forward and often a soft patch. While economic data has been on an encouraging pace recently, are we due for disappointment? 1Q corporate earnings may also be interesting and watched for hard evidence that economic activity is improving, but should provide something of a floor for any downbeat headlines given that year-ago levels were very soft and pose easy comparison at least one more quarter. Be on the watch for our upcoming release of Nvest Nsights where we look to provide a more in-depth review of the 1Q and outlook ahead.